OVER SUPPLIED BUT SHORT OF GAS – YOU ARE PROBABLY ITALIAN!

Snow is falling
all around me
children playing
having fun..”

Yeah, the winter is coming…

I spent the last few of those in Italy as an end consumer and a power trader. Apparently, I have remained oblivious to the challenges of the deregulation progress in another segment of the energy market – natural gas. If you are like me, see below what we have missed.

February 7th, 2012 is an emblematic day for the Italian natural gas sector. A record volume of 465,9 mcm has been consumed. The intense cold weather in Europe caused a sharp increase in the gas demand in Italy.

In 2012, the country had a total import capacity of 120.5 Bcm, which was 62% more than the level of its gas consumption (74.3 Bcm). The country was mostly supplied via long-term contracts, which amounted to approximately 110 Bcm (48% above gas demand). The fast rising supply and the decline in gas consumption since the mid-2000s led to a situation of oversupply in the Italian gas market.

Why, then, this paradox – Italy is at risk of periodic gas shortages every time the temperatures are low?!

While the gas sector has been open to competition since 2003, the Regulator has reported little competition on the supply side. Among the main reasons is the lack of access to gas import and storage capacity to new entrants.

Three important steps could improve this situation – construction of new pipelines, LNG terminals and storages.

The access to the national transmission is regulated and transparent but shippers find it hard to get the not used capacity in the import pipelines. To alleviate this, since 1 January 2014, the Secondary Capacity Market started on PRISMA for transactions at the interconnected points with foreign transportation systems. However, despite these measures the problem with the access is still not completely gone.

According to the Legislative Decree no.164/00, firm capacity at entry points interconnected to import pipelines is to be granted in relation to import contracts on a multi-year basis (up to 5 years) and firm capacity at other entry points (and exit points) is to be granted on yearly basis. From 116 Bcm total import capacity in 2011, 103 Bcm of gas were reserved for priority access for long term contracts, leaving only 13 Bcm of unreserved access. Since 2002, total import capacity has increased by 32 Bcm, but unreserved capacity has increased by less than 9 Bcm due to projects that have been developed with long term contract commitments, which has resulted in the reservation of the available pipeline capacity and, as a consequence, blocking others to use that capacity.

Storages provide another way to get access to flexible supplies or alternative supply in case of interruption of imports in order to meet gas demand fluctuations. However, the rapid decline of gas volumes in the storages at times, when cold temperatures persisted raised concerns about the potential ability of these storages to deliver enough gas in the event of a sudden peak in the daily demand.

New storage capacity should help to solve this problem but the long authorization process, together with environmental impact assessments, and macroeconomic conditions since 2008 have become major barriers to creation of new storage capacity.

The draft of the National Energy Strategy (published in 2012) envisaged a development of 18 new storage projects by 2020. This would lead to an increase in national storage capacity to 26 Bcm/y by 2020 (an increase of 73% on current available capacity). Operators’ access to storages would also be liberalized through a market-based system of capacity allocation. In the early 2013 the Government provided a package of reforms towards the liberalization of the sector. This package included storage also measures for allocation of gas capacity. Following this about half of the commercial existing capacity (i.e. 4.2 Bcm) is auctioned and the remaining storage capacity will continue to be allocated under existing procedures.

Apart from new pipelines and storages, the construction of new LNG terminals could improve supply security. However, despite the price and supply diversity advantages it could bring, LNG is likely to continue to struggle to make major inroads against piped supplies. A number of new LNG terminals have been proposed but are put on hold. The oversupply issues have put new projects on the back burner, even though the volume of existing contracted piped supplies is set to fall.

Now, given the situation we have, the key questions are: will Italy be able to upgrade its pipelines infrastructure? Will Italy be able to build new regasification plants and storages? If we look at Italy’s past energy history, we should answer with ‘yes’ to the first question and with ‘no’ to the second one. In the past years, Italy demonstrated a strong capacity of building pipelines but new projects for LNG and storages have always been rejected due to the opposition of local population. Nowadays, it seems that inside the political parties there is a push to remove all kinds of obstacles to the realization of plants supplying energy to the country. The future will show whether or not such a push really exists and weather it would be successful.